Answer: Health economics is one of many disciplines that can be used to analyse issues of health and health care from the perspective of public health, specifically as part of the collection of analytical tools known as Health Services Research. However, from the standpoint of economics, health economics is just one of many areas where economic ideas and methodologies can be used. So, when we talk about the ideas of health economics, we’re really talking about economic principles and how they might be applied to health and health care.
All about Markets, Demand and Supply in Health economics
Markets
Economics is a social science, as is emphasised in the definition of economics that refers to how society decides. Although society does make collective decisions about what, how and for whom to produce, in most modern economies this is largely done through markets, by the interaction of those who wish to buy (buyers, or consumers) and those who wish to sell (sellers, or suppliers).
Economics analyses markets mainly through what is called price theory. A market brings together the demand for goods from consumers and the supply of those goods from suppliers. Consumers and suppliers base their buying and selling on the price that they must pay or will receive. Price therefore acts as a signal to both groups as to what they should do in the market. Consumers will want to buy more if the price is lower, but suppliers will want to sell more if the price is higher. If prices are too high, then suppliers will not be able to sell all that they want to and may lower the price. If prices are too low, there will be consumers who cannot buy all that they want. As a result, consumers may bid more, or suppliers may see the possibility that they can raise their price but still be able to sell all that they want. Simple observable indicators like these, the presence of excess demand or supply, determine how much of a good or service is sold and the price that it is sold for.
This simple model of a market for a single good shows one way in which society decides for whom to produce. Consumers can obtain goods if they are both willing and able to pay for them; the more willing and the more able that they are, the more that they can potentially consume. Also, a strong willingness and ability to pay is reflected in high demand even at high prices, which signals to suppliers that they should supply more. So, scarce resources are allocated to producing goods for which demand is high rather than other goods for which the willingness and ability of consumers to pay is less. The demand for such goods is lower and their prices are lower. This, therefore, also shows how markets decide what to produce as well as for whom.
Demand for health care, demand for health and need
If we are considering the market for health care, we will be interested in the demand for health care. However, in considering this demand, it is important to recognise that health care has special characteristics that may make it different from other goods. One factor is that health care is not usually demanded because it is in itself pleasurable; in fact, it may be unpleasant. Instead, it is demanded mainly to improve health. So, even if health care is in itself unpleasant, it leads to more pleasure than would otherwise have been the case.
If health care is only demanded in order to improve health, is there then a demand for health improvements? Health can indeed be regarded as a good, in fact a fundamental commodity that is essential to people’s well-being, leading to a demand for improvements in it. Health does have characteristics that more conventional goods have; it can be manufactured; it is wanted and people are willing to pay for improvements in it; and it is scarce relative to people’s wants for it. However, its relationship with the demand for health care is not one-to-one, because although health is affected by health care, it is also affected by many other things and it also affects other aspects of welfare, not just health care. As a good, health is even more peculiar than health care, because of its characteristics. It is less tangible than most other goods, cannot be traded and cannot be passed from one person to another, although obviously some diseases can.
In the context of ordinary goods and services, economics distinguishes between a want, which is the desire to consume something, and effective demand, which is a want backed up by the willingness and ability to pay for it. It is effective demand that is the determinant of resource allocation in a market, rather than wants. But in the context of health care, the issue is more complicated than this, because many people believe that what matters in health care is neither wants nor demands, but needs. Health economists generally interpret a health care need as the capacity to benefit from it, thereby relating needs for health care to a need for health improvements. Not all wants are needs and vice versa. For example, a person may want nutrition supplements, even though these will not produce any health improvements for them; or they may not want a visit to the dentist even if it would improve their oral health.
Supply
The supply side of the market is analysed in economics in two separate but related ways. One is related to the resource input and goods output model outlined above, looking at how resource use, costs and outputs are related to each other within a firm. Some of the issues that this illuminates concern efficiency in production, which will be discussed below. Others include issues such as economies of scale – for example, are there any cost savings through having larger general practices?; productivity – for example, how many more surgical operations can a hospital provide if it hires an extra nurse?; and factor substitution – for example, does allowing dental hygienists to replace dentists in undertaking certain tasks lower the costs of producing dental care?
The other way in which supply is analysed is so called market structure – how many firms are there supplying to a market and how do they behave with respect to setting prices and output and making profits? There are two well-known theoretical extremes of market structure. Perfect competition has very many firms in the market so that none has any real economic power, none makes any profits, prices are as low as they can be and output is as high as can be. A monopoly has only one firm, which has great market power, makes as large profits as can be had and has higher prices and lower output. Other models are somewhere in between. The behaviour of some health care organisations, such as pharmaceutical companies, providers of services like dentistry, ophthalmic services and pharmaceutical dispensing and for-profit insurance companies can relatively easily be analysed using these models. It may be more difficult for other organisations. However, they may provide relevant insights, for example regulation of the UK provider sector is increasingly guided by the use of market forces involving contestability to provide some competitive pressures for efficiency.
